Tuesday, November 25, 2014

NOT A HEALTHY SIGN - HIGH YIELD BONDS VS STOCKS

John Boyd, CFP

‚ÄčNOT A HEALTHY SIGN - HIGH YIELD BONDS VS STOCKS

The chart shows a divergence between SPY representing the S&P 500 and JNK representing an index of High Yield Corporate Bonds.  Normally these track with the "junk" bonds going up when the stocks go up. 

That makes sense, because higher stocks usually means higher profits and increasing financial strength of the companies.   While that may be true for the large successful companies, the drop in High Yield bonds (below investment grade) shows that the weaker companies are getting weaker while the strong are getting stronger.

If the recovery is broad based and based upon economics of profits you would NOT expect these to be going in opposite directions.

Perhaps the decline in junk bond prices more closely reflect the dropping commodity prices, and the stock are reflecting the effect of printing a lot of money and low interest rates.

There is also a similar divergence between Small US Stocks and Large US Stocks which probably has the same root cause.

At some point these have to resume their relationship by bonds going up and/or stocks going down.



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